Dr Azeem Ibrahim is a fellow and member of the Board of Directors at the Institute of Social Policy and Understanding

Analysis: Getting and spending – the UK economy today

Analysis: Getting and spending – the UK economy today

By Dr Azeem Ibrahim

The British economy has ground to a standstill and the government seems powerless to create a meaningful recovery.

The bank crisis has been made worse by the authenticity of the austerity measures introduced last year in the absence of a comprehensive growth plan. The International Monetary Fund is therefore belatedly calling on Britain and Germany to delay their cuts programs, but there are no signs of movement just yet.

How much of the Tory party leadership's decision-making is based on ideology and how much on sound economic sense is debatable. But the injunction "follow the money" certainly creates the perception that the Tory party, like its transatlantic equivalent the Republican party, is beholden to donations from the big financial institutions.

Both ruling parties profess to be the party of small business and enterprise, but both receive substantial funding from the City of London or Wall Street from the very hedge funds, financiers and private equity firms which were key players in the crash of 2008.

As Seumas Milne of the Guardian noted last month, "it's the refusal to intervene directly in banking and finance to drive recovery that most starkly reveals whose interests the government puts first".

As the Occupy Wall Street movement is making clear all over the world, people are getting restless with the alignment of politicians with the very, very rich. Far from supporting the small shopkeepers of Britain, the coalition government is backing the institutions which, while amassing huge amounts of capital to achieve stability, are withholding it from investment into recovery and growth.

Another shortcoming of politicians is their manipulating of facts and figures to suit their ends. As John Redwood commented in his Diary on October 6th: "Having an intelligent economic discussion on how to fix the UK is not made easy by a refusal of most commentators and politicians to work from the actual figures."

While prime minster David Cameron would like to blame the previous Labour government for overspending by £428 billion, he has failed to remind the public that his government plans to borrow another £480 billion over the next five years.

This does not look like a deficit-cutting strategy at all and it is difficult to see how the government is in fact paying down the nation's credit card, as Cameron professes.

The combination of halting economic growth and increasing public borrowing and spending is hardly a recipe for growth and recovery. Cutting essential frontline services to pay for interest on bank bailouts is not going to help anyone but the banks.

The coalition should be concentrating their thinking on a growth strategy based on promoting entrepreneurship and small and medium businesses, the real engines of growth and the biggest job creators in the country. But the problem remains of how to stimulate demand and confidence as there will be little incentive to expand a factory or take on new staff if the orders are simply not there.

Confidence would be bolstered if the government could restrain public spending and maintain even a slow but sustainable growth rate, as a poor recovery is better than no recovery at all.

After the traumatic events of the last three years, the UK economy needs a credible plan for reducing the deficit, grounded in reality-based forecasts for growth, making the necessary decisions about where spending cuts will actually be made, and also, most likely, introducing additional tax increases for a period of five or more years.

But just how fast can the economy expand after the traumas of the past three years?

Michael Dicks, an economist at Barclays Wealth, has estimated that as much as 7.5% of Britain's potential output has been lost, making recovery a longer, slower climb. The country's economic future will certainly be less spectacular than the pre-recession gilded age, and after those excesses, as a recent article in the Economist suggests, "a period of private sobriety and public austerity may prove to be no bad thing".

Meanwhile, the crisis in the eurozone has added an alarming undercurrent to the UK's non-recovery, further threatening the country's export market and shaking the financial sector.

Economic thinktanks have been busily providing suggestions for this uncertain new world, but so far no convincing alternative has been put forward to replace our existing battered markets.

In the eurozone, all leaders have come up with to date is 'a plan to have a plan' and. in the meantime, attitudes to wealth, poverty, taxation, politics and government have all been opened up to discussion and debate – as well as protest and dissent – with no real end in sight.

Dr Azeem Ibrahim is a fellow and member of the Board of Directors at the Institute of Social Policy and Understanding

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